Saturday, December 13, 2014

The $1 trillion Cromnibus bill to fund the federal government for another year contains a juicy handout to banks. Banks will be allowed to play the derivatives market using FDIC guaranteed money. Taxpayer money.
Derivatives are an undesirable financial deal, basically gambling, and they take money that might be used to grow the economy and use it for pure gambling. A derivative is not a stock or a bond. It's bet between two parties on the price of something (commodities, stocks, foreign exchange, bonds, whatever) in the future. "I bet the price of oil will go to $120 by March 2015". " I bet it won't". hands are shaken on the bet, and come March someone pays off. The money does not go for starting up a company, building a factory, developing a new product, buying inventory, financing new aircraft, or anything that creates jobs and grows the economy. As such, we ought to do everything we can to prevent gambling on derivatives. There are better things for banks to do with their money.
Federal Deposit Insurance Corp (FDIC) is a government guarantee of banks. Roosevelt set it up in Great Depression 1.0 to convince depositors that they could leave their money in a bank and not worry about the bank failing and taking all their savings with it. Prior to FDIC, anytime depositors got jittery, they ran to their bank and withdrew all their money. When everyone did this, the bank withered and died, often within hours. Now, 80 years later, FDIC is still with us. FDIC means that no matter how dumbass the bank may be, Uncle will pay off the depositors. Nobody has to worry about loosing money in a bank.
Which means the banks can take some unholy risks, figuring that Uncle will bail them out.
Part of Dodd-Frank required that banks no longer gamble in the derivative game using FDIC insured funds. An excellent idea.
Apparently the banks threw bags of money at politicians and the politicians lifted the "no FDIC money for derivatives" ban. They slipped it into the Cromnibus late at night.
Money talks. Politicians walk.